Multiplicative noise, fast convolution and pricing

DOI10.1080/14697688.2012.729857MaRDI QIDQ2879044zbMATH OpenOpenAlexFDO

Authors Sofia Cazzaniga, Giacomo Bormetti

Publication date 5 September 2014

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1107.1451

zbMATH Keywords

computational financenon-Gaussian option pricingnumerical methods for option pricingstochastic processes

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Numerical solutions to stochastic differential and integral equations (65C30) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: In this work we detail the application of a fast convolution algorithm computing high dimensional integrals to the context of multiplicative noise stochastic processes. The algorithm provides a numerical solution to the problem of characterizing conditional probability density functions at arbitrary time, and we applied it successfully to quadratic and piecewise linear diffusion processes. The ability in reproducing statistical features of financial return time series, such as thickness of the tails and scaling properties, makes this processes appealing for option pricing. Since exact analytical results are missing, we exploit the fast convolution as a numerical method alternative to the Monte Carlo simulation both in objective and risk neutral settings. In numerical sections we document how fast convolution outperforms Monte Carlo both in velocity and efficiency terms.

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Cites work

• A fast algorithm for computing integrals in function spaces: Financial applications
• A path integral way to option pricing
• An empirical model of volatility of returns and option pricing
• Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation
• EXPLICIT SOLUTIONS FOR A NONLINEAR MODEL OF FINANCIAL DERIVATIVES
• Generalized autoregressive conditional heteroscedasticity
• scientific article; zbMATH DE number 1517499 (Why is no real title available?)
• Numerical Methods in Finance and Economics
• On option pricing models in the presence of heavy tails
• Pricing exotic options in a path integral approach
• The pricing of options and corporate liabilities

Cited in

(2)

• Reduction and reconstruction of stochastic differential equations via symmetries
• Short maturity forward start Asian options in local volatility models

Describes a project that uses

Uses Software

• QRM

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